Korean automobile surge
French request for surveillance measures
Importance of bilateral safeguard mechanisms

There have been many developments since the EU-Korea Free Trade Agreement (FTA) celebrated its first anniversary on July 1 2012 (for further details please see "EU-Korea FTA: celebrating its first anniversary with a fine"). The European Union may now consider a challenge to the Korean automotive trade, as France has requested the European Commission to monitor Korean auto imports into the European Union.

Korean automobile surge

According to French Minister for Production Recovery Arnaud Montebourg, the overall level of Korean cars imported into France increased by 50% in January and February 2012, when compared to the same period in 2011. Further, he stated that the small diesel car segment has been hit particularly. European statistics confirm that Korean car imports into the European Union increased by almost 25% in the first half of 2012, when compared to the same period in 2011, and that the increase has been much more significant for small cars. Montebourg blamed this surge in imports on the decreased import duties under the FTA. The tariff for small cars was reduced to 8.3% in July 2011, then to 6.6% in July 2012 and will be completely eliminated by July 2016. The tariff for medium and large cars was reduced from 10% to 7% in July 2011 and then by a further 3% in July 2012. It will be eliminated by July 2014.

Since the first tariff reduction just over a year ago, close to 400,000 Korean cars have been imported into the European Union. During that period, EU manufacturers have seen only a modest increase in exports to Korea. While this translates into a sales growth of 11% to 12% by Korea's two largest companies (Hyundai and Kia), France's Peugeot announced first-half losses of €819 million, the potential cut of more than 8,000 jobs and the first automobile factory closure in France in over a decade.

French and Korean government and industry officials disagree on the cause of these increases. Montebourg claims that the increased imports are due to the FTA. For its part, the Korea Automobile Manufacturers Association argues that the increase is due not solely to the FTA, but to a combination of reasons, including:

  • new car models;
  • stronger EU consumer confidence in Korean automobiles; and
  • more effective marketing strategies.

Some analysts also point to other factors, such as the weak Korean won.

France's monitoring request closely follows Montebourg's announcement of a plan to support the French automobile industry at the end of July 2012.

French request for surveillance measures

Relying on the provisions of the FTA, in August 2012 France requested that the European Commission impose prior surveillance measures, which may ultimately lead to the adoption of a bilateral safeguard measure.

Prior surveillance may be requested where the trend in imports of a product covered by the FTA is such that it could cause serious injury to a domestic industry. Surveillance may also be sought if there is a surge in imports of sensitive goods in one or more EU member states. The European Commission may adopt prior surveillance measures if the conditions set forth in the FTA are satisfied after consulting with the EU member states. If surveillance measures are imposed, importers of Korean cars will have to register intended imports ahead of importation, as imports will have to be accompanied by a surveillance document.

If the surveillance measures were to establish that there has been a significant increase in imports of Korean cars into the European Union, a bilateral safeguard investigation could be initiated at the request of the EU car industry or one or several EU member states, or by the European Commission on its own initiative. During the safeguard investigation, which can take up to 200 days, the commission would assess whether the EU car industry has suffered injury as a result of an increase in imports caused by the tariff reduction under the FTA. A safeguard measure could take the form of:

  • a suspension of the tariff liberalisation provided for in the FTA; or
  • an increase in tariffs, up to the levels prevailing before the FTA's entry into force in July 2011.

A safeguard measure may be imposed for two years, with a possible two-year extension, and would require equivalent trade compensation to be provided to Korea.

While an unnamed Korean official has called the French claim "groundless", the Korean and EU trade authorities are reportedly in communication over the issue. The European Commission will decide within one month whether to act on the French request.

Importance of bilateral safeguard mechanisms

Whether the European Commission will impose surveillance measures is a sensitive question. The automobile sector is a key industry for both the European Union and Korea, so any action will have important ramifications for both sides.

France's request for the imposition of surveillance measures highlights the importance of special safeguard provisions – as opposed to the rules of the World Trade Organisation (WTO) Agreement on Safeguards – in preferential trade agreements. With the continued development of bilateral and plurilateral trade agreements – more than 500 have been notified to the WTO and many are under negotiations – domestic industries and governments are likely to rely increasingly on special safeguard provisions to monitor imports of sensitive goods and seek temporary remedies where they consider that an increase in imports resulting from trade liberalisation is causing them injury. The use of special safeguard provisions, which have seldom been invoked in the past, will give rise to new questions for governments, producers and traders, and could affect the implementation of preferential trade agreements.

For further information on this topic please contact Charles Julien or Jasper M Wauters at King & Spalding LLP by telephone (+41 22 591 0804), fax (+41 22 591 0880) or email (cjulien@kslaw.com or jwauters@kslaw.com).

This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.